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October 14, 2013

Prosecutors Should Charge JP Morgan’s CEO Jamie Dimon

JP Morgan Chase’s CEO Jamie Dimon is not being picked on; he’s not being targeted; and, he’s not being blamed for the conduct of others.  He is reaping what he himself sowed and he should be prosecuted just like anyone else for his conduct and actions.  Because he is a big shot on Wall Street, the CEO of the biggest too-dangerous-to-fail bank, unimaginably wealthy, well-connected, welcomed with open arms at the White House, and even well liked, should not immunize him from prosecution.

Rhetoric aside, let the facts as they are known and/or reported speak for themselves.

Exhibit A is a shocking, but little-noticed recent admission by Dimon himself regarding the bank’s compliance or, more accurately, egregious failure of compliance.  Buried in a Wall Street Journal article that reported on JP Morgan’s recent claims of “bulking up oversight” it was disclosed for the first and only time that Dimon has only just recently

 

“given greater authority to executives in charge of risk, legal, and compliance, which means they can no longer be overruled by business heads….”

 

That is shocking because it means that JP Morgan’s most senior management – including its CEO and Chairman of the Board, Jamie Dimon — placed greater emphasis on revenue, profits and bonuses than on risk, compliance and legal.  The importance of this admission simply cannot be overstated.  When business heads are authorized by senior management to overrule risk, legal and compliance, that signals to everyone in the organization that profits come above all else.  It devalues and denigrates risk, legal and compliance, which infects and shapes the entire culture.  That management ethos, probably more than anything else, reveals and explains why JP Morgan is in so much legal trouble today.  

 

Even more shocking is that Dimon only took this action to stop business heads from overruling risk, legal and compliance after (1) many major enforcement actions by multiple federal, state and international regulators and prosecutors;  (2) tens of billions of dollars in actual and likely fines, settlements and penalties; (3) five years after the financial crash and economic crisis it caused; (4) three years after the passage of historic financial reform legislation; and (5) more than a full year after the London Whale disaster. 

 

Exhibit B is the so-called “London Whale” debacle, which should be called the “Dimon Whale Debacle” because he turned the London CIO’s office into a high risk prop trading operation; he nurtured it; he profited from it; and, he was involved in concealing the Whale’s losses, according to numerous reports.  Indeed, the entire Dimon Whale episode exposes his and the bank’s prior claims to being first-in-class risk managers to be PR and spin at best and fraud at worse. 

First, as proved by their reporting in early April 2012, the Wall Street Journal and Bloomberg News knew more about what was going on in JP Morgan’s London CIO office than did Jamie Dimon, his entire management team and all of risk, legal and compliance.  While Jamie Dimon dismissed the huge trade by his London office on April 13, 2012 with his infamous “a complete tempest in a teapot” comment, he admitted this on May 10, 2012 when he finally disclosed that those news reports were accurate and that the bank’s London CIO office had in fact engaged in massive, high risk derivatives trades.  (This was very convenient timing for Dimon because, unlike April 13th, the annual meeting was just days away and most votes on his position as CEO and Chairman were already cast.)

Second, what is shocking about this is not only that this happened, but that Dimon, the bank’s CEO and Chairman, admitted this and that his entire executive team and all of the bank’s risk, legal and compliance knew nothing about what was going on in the London CIO office.  This was a complex derivatives bet with more than $150 billion of the bank’s depositor’s money, some of it federally insured, and with a notional amount exceeding $1 trillion, but he claims no one knew.  

Third, this was not the case of a rogue trader at some distant office of the bank.  This was one of the bank’s most important offices in London in charge of investing $350 billion or more of depositor’s money.  Yet, it had almost no actual controls or compliance procedures, other than on paper and as window dressing.  None of this is or can be disputed as proved by the extensive report by the Senate Permanent Subcommittee on Investigation’s report (PSI) and the complaints filed by the Southern District of New York charging two mid to low level employees for criminal wrongdoing.

Fourth, as the losses from the London Whale trade were mounting in early January 2012, JP Morgan’s multiple risk control alarms started sounding.  Indeed, most of those controls were breached, which should have required the trade to be reduced so that the risk was reduced and losses were avoided or minimized.  This did not happen because the risk controls were changed, modified, manipulated or otherwise evaded, as detailed in the PSI report.

Fifth, Jamie Dimon himself enabled the ongoing concealment of the London Whale losses because he personally approved changing the value at risk (VaR) model in January 2012.  While it’s difficult to get sufficient information to come to a clear conclusion, it would be interesting to determine if Dimon’s authorized change to the VaR model actually concealed more losses than the alleged criminal mispricing by the two employees did.  (Dimon’s attempts to minimize his role in this and the changes to the risk models simply are not plausible.  If that was true, why would the written approval of the CEO and Chairman of the Board be required to change the VaR?)

Sixth, more noteworthy, what message does Dimon and JP Morgan’s senior management send the organization when they change, modify, or ignore the models and risk controls so that the London Whale losses are not recognized and handled in the ordinary course according to preset procedures?  It looks like senior management was interested in letting the bets ride in the hope that the losses would slow, turn to gains or not have to be revealed until a more convenient time.  Could this message have been received and followed by the two employees who have been criminally charged? 

                How could this happen?  An ineffective, handpicked Board of Directors is one likely explanation.  After all, given Dimon’s own admissions and statements, why hasn’t he and other senior managers in legal, risk and compliance been fired for such stunning, egregious failures?

                Proving this is the Chairman of the Board of Director’s Audit Committee, who appears to be more of a blind Dimon cheerleader than a director charged with bringing independence and skepticism to his job.  That shouldn’t be too much of a surprise given that Dimon brought him to JP Morgan from Dimon’s prior bank, Bank One.

This Chairman of the Audit Committee went so far as to say on October 13, 2013 that the many very serious civil and criminal investigations of JP Morgan Chase were the result of a “political agenda” and that “we’re just going to have to put up with this.”  That is a shocking statement from the Chairman of the Audit Committee of the biggest too-big-to-fail bank in the world.  He doesn’t appear interested in getting to the bottom of these accusations or finding the truth or making sure the bank’s acting appropriately.  Apparently there is no need to because, according to him, it’s all political.  

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